Combatting climate change is set to accelerate a significant reallocation of capital.
The European Union is to stop funding oil, gas, and coal projects at the end of 2021, cutting €2bn (£1.7bn) of yearly investments (2019). Black Rock CEO Larry Fink’s Chairman’s Letter to Shareholders ’Climate change has become a defining factor in companies’ long-term prospects.
He believes the world is on the edge of a fundamental reshaping of finance. Sustainability will be the new standard for investing. Following the lockdown, Pulitzer Prize-winning author and global energy expert, Daniel Yergin, in his book “New Map: Energy Climate, and the Clash of Nations” raises concern about energy’s role in climate change is challenging our economy and way of life, accelerating a second energy revolution in the search for a low carbon future.
Carbonomics – transition towards carbon-neutral economy
Financial markets clearly show a global shift towards green finance. Goldman Sachs estimates that clean tech has the potential to be a major role to play in the upcoming economic recovery. Total investment opportunity of up to $16 trillion by 2030 in and create 15-20 million jobs worldwide, through public-private collaboration (e.g., “The Green Deal”). Renewable power will become the largest area of spending in the energy industry in 2021, on Goldman Sachs estimates, surpassing upstream oil & gas for the first time in history, driven by bifurcating cost of capital (up to 20% for long-term oil projects, down to 3-5% for renewables). For the first time ever, 2019 green energy stocks outperformed global stock market.
The two-speed de-carbonization process mans fiscal and monetary stimulus is accelerating clean tech investments already at scale (e.g., renewables), and carbon pricing is coming on.
Green vs. fossil
British Petroleum said it would cut its oil and gas output by 40% by 2030 and spend $5 billion a year on low-carbon projects that it hopes will turn it into one of the world’s biggest green power producers – to reach 50 gigawatts of renewable energy in its portfolio by 2030. It’s estimated it will cost the company $60 billion to reach its target. BP already has a debt of $41 billion and as investors increasingly turn away from fossil fuel producers in favor of green energy firms.
By contrast, shares in Denmark’s Orsted, one of the world’s biggest offshore wind developers, have surged 135% over the same period to give it a market value of $60 billion. Shares in Spanish utility company Iberdrola, which has 33 GW of installed renewable power and is developing several projects, have jumped 78% over the past two years, bringing its market capitalization to $80 billion, on a par with BP.
The emergence of green finance
Green finance is defined as financial services (green bonds, green loans, green funds, green fintech, green microfinance) that provide environmental benefits apart from financial.
Green Bonds are set to keep flying in 2020. The European Union is planning to sell green and social bonds to finance some of its 750 billion euro ($88 7 billion) recovery fund (Bloomberg). Through the end of September, more than $189 billion in green bonds — whose proceeds are used to fund environmentally-friendly projects — had come to market for the year, outstripping 2018’s total of $171 billion. Credit-rating agency Moody’s had predicted a record-setting year for green bonds from the outset, but had to revise its projection to $250bn from $200bn after growth exceeded expectations. The average offering is more than three times oversubscribed, according to a recent report from BNP Paribas
Green Funds and Venture Philanthropy are exemplified by the rise of Impact Investments & Ventura Philanthropy Global Impact Equity fund. Nine of the biggest environmental, social, and governance mutual funds in the U.S. outperformed the Standard & Poor’s 500 Index last year, and seven of them beat their market benchmarks over the past five years. Bloomberg’s fourth-annual ranking of the largest environmental, social, and governance funds with five-year track records, shows sustainable investing isn’t just for dreamers. It’s a money-making opportunity that’s gaining popularity. Assets managed by the 75 retail funds in the survey climbed more than 34% to $101 billion last year as socially conscious money managers bet sustainable investing will help them find new growth opportunities.
Public-private partnership structures have “blended finance” structures, investment funds in which risks and rewards are differentiated by shareholders classes, to issues shares with different characteristics in reaction to the need of each investor.
Green loans are any type of loan instrument made available exclusively to finance or re-finance, in whole or in part, new and/or existing eligible green projects.
Debt-for-climate swap links developing states’ debt relief to investments into sustainability in order to respond effectively to the COVID-19 crisis.
Recognition of climate risk as an investment risk. This considers both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.
Carbon tax is a fee on the carbon content of fossil fuels. Though levied “upstream” where the coal, oil or gas is extracted or imported, it charges fossil fuel users for the climate damage their fuel use causes by releasing heat-trapping carbon dioxide into the atmosphere.
Popularization of eco-industrial parks
Eco-industrial parks aim to imbed industries to society by creating shared eco opportunities, improved ecosystem, responsible business practices. They also serve as an incentive for direct international investment, leading to industries’ prosperity and more employment opportunities. For instance, in Vietnam, the creation of eco-industrial parks attracted 50% of foreign investment, created 3 million new jobs, and made EIP generate 40 percent of Vietnam’s GDP. The 2012-2018 pilot project in 7 countries has led to 20,939 t/yr solid waste reduction, 59,800 greenhouse gas reduction, 1,262,218 m3/yr water savings and 6,746,642 euro/yr saved.
To hardwire sustainability into its national financial strategies
The world is on a way to develop strategies to create green finance infrastructure in order to deliver the Paris Agreement and Sustainable Development Goals (SDGs). To decrease CO2 emission, new financial infrastructure has to enable sustainable finance flow, generating long-term, sustainable returns for investors in the same time integrate financial, environmental and social factors into investment portfolios.
To scale up sustainable finance in developing countries, where there is a lack of debt, equity, and blended green finance as well as to bridge the gap between sustainable projects and leading international green financial hub, attract investors, international climate finance accelerators, and green stock exchanges – financial infrastructure’ such as climate finance accelerators, green stock exchanges.
Last but not least, people have to develop strategies of awareness-raising on climate change and sustainable development.
Nataliya Katser-Buchkovska is the CEO and founder of the Ukrainian Sustainable Fund
